Does your arbitration agreement include a severability clause?

Upholding an arbitration agreement with multiple unconscionable terms would incentivize an employer to draft a one-sided arbitration agreement in the hopes that employees would not challenge the unlawful provisions, the California Court of Appeal said in a recent case.

Facility Solutions Group, Inc. (FSG) – the defendant in the case of Mills v. Facility Solutions Group, Inc. – employed the plaintiff as an apprentice electrician from October 2018 to August 2019. The plaintiff reviewed FSG’s onboarding documents using a cellphone and electronically signed a two-page, single-spaced, small-print employee arbitration agreement.

Under the arbitration agreement, the plaintiff and FSG agreed to submit any disputes arising during or after employment to binding arbitration. The agreement included a severability clause stating that, if any of the agreement’s provisions were invalidated, that determination would not affect the validity of the rest of the agreement.

On Nov. 20, 2020, the plaintiff filed a class action against FSG on behalf of himself and other past or present employees. He alleged violations of California’s Labor Code for the following:

• failure to pay minimum wages;
• failure to pay overtime wages;
• unlawful deduction of wages;
• failure to pay vested vacation wages;
• failure to provide meal periods;
• failure to reimburse business expenses;
• failure to timely pay wages;
• failure to maintain payroll records and to provide accurate itemized wage statements;
• failure to provide one day’s rest out of seven.

The plaintiff also brought a claim for unfair competition under the Business and Professions Code and a claim seeking civil penalties under the Private Attorneys General Act of 2004 (PAGA).

On Nov. 23, 2020, the plaintiff filed a complaint alleging claims under the California Fair Employment and Housing Act (FEHA) for disability discrimination, failure to engage in the interactive process, failure to provide reasonable accommodations, retaliation, failure to prevent discrimination and retaliation, wrongful termination in violation of public policy, and failure to provide personnel and payroll records.

In February 2021, the trial court granted FSG’s motion to compel arbitration. It found that, while some of the arbitration agreement’s provisions were substantively unconscionable, they could be severed. In April 2021, FSG filed another motion to compel arbitration in connection with the plaintiff’s class action and PAGA claim. In May 2021, the trial court denied this motion to compel arbitration. FSG appealed.

The California Court of Appeal for the Second District affirmed the trial court’s decision to deny FSG’s motion to compel arbitration. The appellate court found that unconscionability permeated the arbitration agreement and that the trial court could not simply sever the offending provisions and would instead have to rewrite the agreement and to create a new agreement upon which the parties never agreed.

First, the appellate court ruled that the arbitration agreement, which had elements of procedural unconscionability, was an adhesive contract since it was imposed as a condition of employment. Though the plaintiff had time to sign the agreement, it had a small font, with over 60 lines of text on the first page. The plaintiff accessed the agreement on his cellphone and would have experienced difficulty in reading the small print, the appellate court said.

Second, the appellate court held that the arbitration agreement had multiple provisions that made it substantively unconscionable. According to the appellate court, the agreement:

• unreasonably required the plaintiff to pay the filing fee and the costs for postponement, for an appeal, and for a potential second hearing;
• had substantively unconscionable attorneys’ fees provisions;
• failed to provide for adequate discovery;
• improperly barred the tolling of the statute of limitations.

The waiver of a representative PAGA claim was invalid under California law, the appellate court added.

Third, the appellate court determined that the trial court did not abuse its discretion in refusing to sever the unconscionable terms, given the following: the unfairness that permeated the arbitration agreement, the significant rewriting of the agreement, and the multiple provisions that were substantively unconscionable.

Enforcing the arbitration agreement would incentivize employers to impose numerous unlawful arbitration provisions and would discourage employees from filing lawsuits for fear that they would be forced to bear the costs and burdens of a one-sided agreement, the appellate court concluded.